EM3251 - Discovery: issuing discovery assessments: qualifying conditions and evidence needed to issue a discovery assessment

For guidance on how to issue an ITSA assessment, see SAM20061. For CTSA, see COM23070.

Recovery of overpayment of tax

Where an assessment is needed to recover excessive repayments of tax for an accounting period/tax year you may need to make a s30 TMA 1970 assessment. Please see EM3266 for more guidance on this matter.

Quantifying

Before an officer issues a discovery assessment they must first identify the quantum as accurately as possible to ensure that the correct amount of tax has been recovered.

However, there will be times when it is not possible to identify the quantum accurately. If this happens the officer can use their best judgment to calculate the amount of tax due and issue the assessment. Officers should keep a record of any reasonable inferences they make from the facts available at the time they make the assessment.

Evidencing the discovery and assessment

In any appeal against a discovery assessment, HMRC has the burden of showing that an officer had made the discovery on which the assessment is based.

In order to do this, adequate record keeping is vital and best practice should be followed, see EM3252 and EM3258.

Evidencing behaviour

If a customer has filed a tax return for a year, HMRC has the burden of proof that one of two further conditions for a discovery assessment applies, see EM3232 and EM3233.

However, an officer does not need to show whether either of those conditions applies at the time they make a discovery assessment. If a customer appeals against a discovery assessment, HMRC will need to assert that one of the further conditions applies. It is therefore essential that officers maintain evidence to support that assertion.

Once HMRC has done this satisfactorily, the onus of proof will normally pass to the customer if they are appealing against the amount of the assessment.

‘Protective assessments’

The legislation does not allow HMRC to make ‘protective assessments’ merely to extend time limits to investigate a customer’s position or in case an officer later discovers a loss of tax.

An officer may legitimately make an assessment with approaching time limits in mind if they have already discovered a loss of tax for the year in question, see EM3250, or they can rely on the presumption of continuity, see EM3236. However, officers should avoid describing such an assessment as “protective” as doing so will give the impression that it does not meet the basic conditions for a discovery assessment and invite unwarranted challenges via the appeals process.

An officer should not make an assessment if they merely suspect there may be a loss of tax or to keep a year open to allow them to make further enquiries into a risk.

Source of income

The recent First-tier Tribunal case Ashraf [2018] TC 06355 highlighted that it is important that where HMRC are considering an assessment(s) for any unexplained amounts it should first be identified whether there is a compatible source of income, for example, trading, rental, employment, etc.

Amongst other things, the need for a ‘compatible source’ is driven by the fact that the income tax charge should be computed in accordance with the rules in the relevant part/schedule of the Taxes Acts. Without a ‘compatible source’ HMRC cannot be certain that they have charged the correct tax at the right time.

This does not mean that where there is an established source of income (for example a self-employment) and it is reasonable in the circumstances to attach the unexplained amounts to that trade, an officer won’t be able to issue assessments because HMRC don’t have evidence that the unexplained amounts emanate from that source.

Instead, this particular issue arises where all identified sources of income have been ruled out as the source of the unexplained amounts and HMRC proceed to issue assessments under ‘other’ or ‘miscellaneous’ income charging provisions without a proper explanation.